Within-Firm Pay Inequality
49 Pages Posted: 17 Jan 2016 Last revised: 23 Jan 2017
Date Written: January 17, 2017
Financial regulators and investors alike have expressed concerns about high pay inequality within firms. Using a proprietary data set of public and private firms, this paper shows that firms with higher pay inequality – relative wage differentials between top- and bottom-level jobs – are larger and have higher valuations and stronger operating performance. Moreover, firms with higher pay inequality exhibit larger equity returns and greater earnings surprises, suggesting that pay inequality is not fully priced by the market. Our results support the notion that differences in pay inequality across firms are a reflection of differences in managerial talent.
Keywords: income inequality, wage inequality, managerial talent
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